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APRA reveals stress-test results of the general insurance sector | Insurance Business

The major players in Australia's general insurance sector have strong governance, but may need to be better prepared for the potential fallout from severe economic downturns, a top regulator said.

These were the findings of the sector's first stress test, which saw Australia's four largest direct insurers – QBE, Suncorp, IAG, and Allianz – and two reinsurers face a number of hypothetical stress-test scenarios to gauge whether they are on the “front foot for adverse events.”

The Australian Prudential Regulation Authority's (APRA) expanded its stress-testing regime late last year, as the insurance sector faced what may be the costliest year in history due to a series of wild weather events around the world.

"All participants demonstrated sound governance arrangements including strong oversight by executive board committees, and discussion and challenge of the stress-test results and mitigating actions by senior leadership teams," the prudential regulator said in an Australian Financial Review report.

APRA also cited the need to improve the modelling of economic stresses, especially for insurers with global reach.

"Recent economic downturns in Australia have not been severe when compared to the experience in other countries,” it said. “This means there is limited local historical loss data available to assess and model the impact of very severe downturns on insurers' claims experience and the demand for insurance products.”

Including overseas experience in the stress test will enable insurers to "broaden their thinking on the potential impacts of very severe economic downturns, and not limit this thinking to local historical experience.”

The prudential regulator also called attention to insurers' “normal” practice of assessing capital impacts of stresses over a one-year horizon, noting that “only a few of the participants considered… [the] implications for business continuity management, the mobilisation of claims staff to manage an increased volume of claims, and impacts on supply chains," AFR reported.